Onity Group Inc (ONIT) 2011 Q3 法說會逐字稿

Welcome to the Ocwen third-quarter earnings conference call. At this time, all participants are in a listen-only mode. After today's presentation, we will conduct a question-and-answer session. (Operator Instructions).

Today's conference is being recorded. If you have any objections, please disconnect at this time.

I would now like to turn the call over to Mr. John Van Vlack. Sir, you may begin.

Thank you. Good morning, everyone, and thank you for joining us today. My name is John Van Vlack, and I'm the Executive Vice President and Chief Financial Officer of Ocwen.

Before we begin, I want to remind you that a slide presentation is available to accompany our remarks. To access the slides, log onto our website at www.Ocwen.com. Select Shareholder Relations. Then under Events & Presentations, you will see the time and date for Ocwen's third-quarter financial -- third-quarter 2011 earnings. Click on it and register. When done, click on access event. Select Adobe Flash Player or Windows Media. Each viewer will be able to control the progression of the slides during the presentation. To move the slides ahead, please click on the gray button at the bottom of the page pointing to the right.

As indicated on slide 2, our presentation may contain certain forward-looking statements pursuant to the Safe Harbor provisions of the federal securities laws. These forward-looking statements may be identified by reference to a future period or by use of forward-looking terminology. They may involve risks and uncertainties that could cause the Company's actual results to differ materially from the results discussed in the forward-looking statements.

For an elaboration of the factors that may cause such a difference, please refer to the Risk Disclosure Statement in today's earnings release, as well as the Company's filings with the Securities and Exchange Commission, including Ocwen's Form S-3, first- and second-quarter Form 10-Qs and 2010 Form 10-K.

If you would like to receive our news releases, SEC filings and other materials via e-mail, please contact Linda Ludwig at linda.ludwig[at]ocwen.com.

Our presentation also contains references to normalized results, which are non-GAAP performance measures. We believe these non-GAAP performance measures may provide additional meaningful comparisons between current results and results in prior periods. Non-GAAP performance measures are to be viewed in addition to and not as an alternative for the Company's reported results under accounting principles generally accepted in the United States.

As indicated on slide 3, joining me for today's presentation are Bill Erbey, Chairman of Ocwen, and Ron Faris, President and Chief Executive Officer of Ocwen.

Now we will turn the call over to Bill Erbey. Bill?

Thank you, John. We have much to cover on this quarter's earnings call, including an update on our acquisition of Litton Servicing, our announcement of another major servicing acquisition, Saxon, and a strategic discussion of Ocwen's value creation metrics that I believe you will find useful.

As previously reported, on September 1, Ocwen completed its purchase of the Litton Loan Servicing business, which included mortgage servicing rights with approximately $38.4 billion in unpaid principal balance and Litton's servicing platform based in Houston, Texas and McDonough, Georgia. This acquisition is proceeding very well and according to plan. Ron will discuss our progress on the Litton acquisition in more detail later. You may also reference our 8-K filed on September 2, as amended on October 4, for further information.

In addition, as previously announced, Ocwen has entered into a definitive agreement to purchase Saxon Mortgage Services and related entities from Morgan Stanley. The Saxon acquisition includes mortgage servicing rights worth $26.6 billion in unpaid principal balance as of June 30, 2011, of which Ocwen currently sub-services $10.9 billion, as well as Saxon's servicing operations in Irving and Fort Worth, Texas. In Q3 2011, Ocwen earned total annualized revenues on these subservicing contracts of approximately 20 basis points.

The acquisition also includes the subservicing of approximately $12.9 billion of loans that Saxon sub-services for Morgan Stanley and others. This subservicing may be transferred to Ocwen pending approval by the owners of the servicing, or will be sub-serviced by Ocwen under short-term agreements. The transaction is expected to close in the first quarter of 2012. Please refer to our 8-K filed on October 24, 2011 for further information.

Ocwen's exceptional abilities to lower delinquencies and accurately manage advances were instrumental in our securing the advance financing that facilitated our winning bids for Litton and the Saxon deals. Even with the Saxon signing, the pipeline of potential transactions has increased since last quarter and now exceeds $300 billion of unpaid principal balance.

We continue to make progress toward our goal of selling mortgage servicing assets to a new entity, Home Loan Servicing Solutions, or HLSS. This is part of our strategy for Ocwen to make our business more capital-efficient or equity light. We anticipate that HLSS will be in a position to acquire assets from Ocwen in the next few months. This will enhance our ability to fund future growth and improve our return on equity.

Further information on HLSS will be included in the MD&A section of Ocwen's 10-Q that we anticipate filing no later than November 9. For additional information regarding HLSS, you may also refer to its Form S-1 on file with the SEC.

As mentioned at the beginning of the call, I wanted to devote time today to a more strategic discussion of Ocwen's business model. In short, I will show you how getting more loans current increases revenue, decreases capital intensity and ultimately drives higher returns to our shareholders.

On slide 4, we show delinquency percentage on the left-hand chart and advanced ratio on the right-hand chart for the major segments of our portfolio. The blue line is our legacy portfolio. The green line shows the Saxon portfolio we acquired back in early 2010. And the yellow line shows the HomEq portfolio we acquired in September 2010.

As you can see, we have consistently demonstrated our ability to both substantially reduce delinquencies and generate strong cash flow by bringing down advances. For reference, we also show the starting point for the Litton portfolio.

Slide 5 shows total revenue and annualized basis points for the HomEq, Saxon and Litton portfolios. As we resolve delinquent loans, revenue increases.

On slide 6, we show historical and projected performance for four portfolios. On the left-hand chart, we show capital required as a percentage of unpaid principal balance. We define capital as equity and funded debt, such as the SSTL, or senior secured term loan, less liquidity available for future acquisitions. On the right-hand chart, we show pretax return on capital.

The driving force behind the last three slides is Ocwen's ability to reduce delinquencies. Declining delinquencies increase revenue and reduce the capital intensity of the business. This synergistic combination leads to the result on slide 6, where you can see that we experience very healthy returns on capital as deals mature. Simultaneously, we increase total cash flow for investors and keep more people in their homes. Quality and technology do matter.

As of August 30, Ocwen had deployed $739 million of capital in its servicing business, capital being comprised of equity less cash and available credit. With the addition of the Litton and Saxon portfolios, capital deployed should grow to $1.7 billion, the majority of this increase in capital deployed being our senior secured term loan placed on September 1.

A final observation about the economics of our business is illustrated on slide 7. Ocwen has a cost structure that is 70% lower for nonperforming loans than the industry average. This cost structure embeds substantial unrealized value in Ocwen's mortgage servicing rights relative to fair market value or acquisition costs.

On the left-hand side of this chart, we show the book value of our legacy and Litton MSRs compared to a market valuation by MIAC, our third-party evaluation service, based on market level costs to service.

The third bar shows an internal valuation based on Ocwen's actual cost of service and a pretax discount rate of 18%. As you can see, that translates into an internal value that is over $700 million higher than book value or market value.

The right-hand side of the chart translates these differences into value per share. The first bar shows the book value per share of our net assets, including MSRs. The next bar shows the impact on book value using the market value of MSRs from MIAC.

The last bar shows that value per share would increase by over 75% if one were to value our MSRs based on our actual cost of service. Almost half of the increase in value, or $3.32, comes from the recently boarded Litton transaction. I would point out this chart does not include the impact of the Saxon transaction.

I will now turn the call over to Ron, who will start with a review of our progress with the Litton integration, as well as cover some highlights of our second-quarter performance. Ron.

Thank you, Bill. As Bill mentioned, I would like to start by discussing the Litton acquisition. The Litton portfolio increased our servicing portfolio to $106 billion as of September 30, including over $38 billion of Litton loans. We expect Litton transaction-related costs to total $64 million, which is in line with our prior guidance and includes the $18.7 million incurred in Q3.

We expect to incur an additional non-cash charge of $23 million related to the write-down of the Litton platform that appraised for a higher-than-expected amount. We expect to incur most of these remaining expenses in the fourth quarter of this year. For the new Saxon deal, we expect transition-related expenses to be approximately $51 million.

We are very pleased with the progress of our Litton integration, which is proceeding according to plan. The majority of loans moved onto Ocwen's platform on September 1, while the remainder will move by November 1. Delinquencies have remained roughly flat so far, which is better than expectations.

As you can see from slide 4, past portfolios typically show a modest increase, followed by a sizable decrease within several months. These early results are heartening.

Our successful transfer of such a large volume of loans is a tribute to the experience and capabilities of our people and the scalability of our servicing platform. We are confident that our strong onboarding and delinquency resolution performance will continue with our upcoming Saxon transaction.

Moreover, Ocwen's scalability extends to onshore as well as offshore capacity. We currently serve multiple customers where Ocwen's customer-facing staff is based in the US. Where we locate our staff is driven only by what works best for our clients and investors.

I will now turn to highlights of our third-quarter results. More detail is available in today's earnings release and our third-quarter 2011 10-Q, which we expect to release by November 9.

Revenue and income from operations were up substantially over the third quarter of 2010. As shown on slide 8, revenue was up by 28%, driven largely by year-over-year growth in the servicing portfolio, though the full impact of the Litton portfolio was muted by it only being onboard for one month.

Litton contributed $14.6 million to our revenue in the third quarter. Revenue from operations was up by over $54 million versus the third quarter of last year. The third quarter of last year, however, included $33.9 million in transaction expenses related to HomEq versus the $18.7 million we had this quarter for Litton. Making these adjustments, operating income is up by over 100%, reflecting the economies of scale of our business. John Van Vlack will cover normalized financial results in more detail later in the call.

Slide 9 reflects annualized servicing and subservicing revenue and expenses and basis points per UPB for the past five quarters. In Q3 2011, annualized servicing revenue was up to 68.8 basis points. Subservicing revenue for the quarter was also up a bit to 35.6 basis points, as ancillary revenues from loans boarded in the second quarter have begun to ramp up.

As mentioned last quarter, we have seen some falloff in process management fees as we aligned with new Freddie Mac and Fannie Mae guidelines that restrict certain fees. The annualized overall impact on revenue of these changes should be a reduction of 1 to 2 basis points on a run-rate basis by year end. Normalized pretax net income for the third quarter of this year was 26.9 basis points, which is consistent with the level in Q3 2010.

As shown on slide 10, we continued our progress in reducing advances. In the third quarter, net advances declined by $180 million. The rate of decline has slowed on existing portfolios, as we have fewer opportunities to cure delinquencies as portfolios become more current. We expect greater declines in future quarters as we begin to take down the Litton advances, though it takes a few months, as new modifications require time to go through the process of contact, offer, acceptance, trial and completion.

The rise in delinquencies on our overall portfolio from 24.2% of total UPB at the end of the second quarter 2011 to 28.7% at the end of the third quarter is largely a result of much higher delinquencies at boarding for the Litton portfolio.

Our total modifications for Q3 were 15,743, which is at the high end of the forecasted range. For Q4 2011, we expect total modifications to be between 19,000 and 22,000 as we begin to ramp up activity on the Litton portfolio.

HAMP modifications as a percentage of total modifications continue to make up a smaller portion of our overall modifications. In the third quarter of this year, HAMP modifications were 16% of overall modifications completed.

Along with our success growing the business, Ocwen is still investing in ways to expand our capabilities to serve investors and borrowers. We are in the process of developing or deploying innovative contact approaches with borrowers that should help us lower operating costs, improve service to borrowers and increase value for mortgage investors. We will talk more about these initiatives in future earnings calls.

Finally, as Bill already mentioned, the pipeline of new servicing and subservicing opportunities remains quite robust. While it would not be appropriate at this time to discuss any particular transaction, suffice it to say that currently we are actively pursuing several additional growth opportunities.

Now I'd like to turn the call back over to John Van Vlack. John?

Thank you, Ron. I'd like to walk through our normalized pretax income, shown on slide 11. Fortunately, we only have one item for the third quarter, the expense related to the Litton transaction that amounted to $18.7 million.

As shown on slide 11, backing these costs out of our pretax income results in normalized pretax income from continuing operations of $47.7 million for the third quarter of 2011. That is a 31.4% improvement over Q3 2010. This improvement is attributable to growth in our servicing portfolio and our ability to reduce delinquencies and unit costs.

This also represents an improvement over second quarter of 2011. Ocwen's portfolio completely excluding Litton would have normalized earnings of approximately $45.7 million. Litton on a stand-alone basis contributed about $2 million to pretax income in the quarter, after normalizing for the $18.7 million in transaction costs and attributing to it $9.7 million in interest expense for the Litton advance facility and the senior secured term loan.

At the end of September 2011, Ocwen maintained $229 million of liquidity, including $152 million in cash and $77 million of unused, fully-collateralized advanced borrowing capacity.

Regarding the Saxon acquisition, as Ron mentioned, we have committed advance financing. Net of advance financing, we are estimating the total capital for the transaction to be approximately $375 million, the primary elements being $292 million for equity and advances and the $59 million purchase price. Other significant items include the advance facility reserve account and cash transaction costs.

To fund this, we will use cash on our balance sheet, operating cash flow generated prior to closing and available undrawn credit on our advance facilities. To fund additional requirements, we have multiple options within our capital structure, including the prospect for the sale of the HomEq asset to HLSS, or we may access public or private debt or equity markets.

In the event we land another substantial transaction, we may require raising additional debt and -- equity and corporate debt.

Thank you. We would now like to open the call up to questions. Operator?

(Operator Instructions) Bose George, KBW.

Good morning. Congratulations on the Saxon deal. I had a couple of questions. One is just the profitability of the Saxon portfolio relative to the 27 basis points you guys had on your existing book. Could it be lower, since you already subservice some of that, or just with lower expenses, you end up with profitability somewhere in the same ballpark?

Bose, we look at all these transactions as a net present value. That's one reason we were showing those portfolios. So Saxon is priced in line with all other portfolios that we've acquired.

Okay, great. Thanks. And then just wanted to touch on the issue of raising equity again. You have a series of financial covenants in your credit agreement. Will any of them be breached if you don't raise equity, and can those covenants be amended if you want to do this without having to raise equity?

If we are able to sell the HomEq assets to HLSS, then we would anticipate that we would be able to close without additional equity.

In the event that the HLSS transaction happens after Saxon closes, then in order to close Saxon, we may require additional equity in order to maintain our covenants. And so the amount would depend on a number of factors, including how much cash we generate between now and the close, the timing of the close and the reduction in advances between now and close. So we are not going to provide guidance on that number.

As sort of a related question, is there a certain amount of cash that you want to hold on the balance sheet at all times, if you just want to think of it that way? In terms of the cash (multiple speakers).

Yes, we do maintain cash for liquidity purposes. And that is driven by the requirements of the business. So (multiple speakers)

Okay, great. Thanks a lot.

So the full $229 million that we reported as cash and available credit could not be used on any given day to make of acquisition because of liquidity requirements.

Yes, that's fair. Okay, treat. Thank you.

Large majority would be available.

Bob Napoli, William Blair.

Thank you. Good morning and congratulations on the Saxon deal as well. A question related primarily to page 9, I guess. Just trying to understand. You guys have improved your efficiency ratio pretty dramatically over the last few years, getting your operating expenses down to 24 basis points, 23.5 basis points. I think you were in the 40s a couple years -- like maybe 2.5 years ago.

How much lower -- how much more efficiency can you get? How much lower can that go as -- with these additional portfolios?

Well, our model is a little different than most other servicers. We tend to be focused very heavily on technology with regard to it. So our marginal cost, which is what we are showing, we are 70% below the industry. As we continue to grow, we believe we can continue to become increasingly efficient.

So despite the fact that you've cut that ratio in half, you still -- I mean, can you get it down to the midteens? Is that something -- I mean, where do you think you could bring that (multiple speakers)?

We continue to have initiatives that -- we happen to believe, first of all, there is 100% alignment between quality and effectiveness along with efficiency. If you do it right the first time and don't have rework, you in fact produce a better-quality product at a lower cost. We continue to drive that number down. We have metrics and goals on our KPIs for our senior managers to continue to make us both more effective and more efficient in doing that. So we do not believe that trendline will be broken.

With your cost of funds, what is the effective cost of funds now? I guess if you looked at that -- if you looked at the balance sheet at September 30, can you help me understand what we should see in the fourth quarter in interest expense and what is the effective cost of funds?

Sure. So we've got the cost of advanced financing coming down gradually as we carry less excess capacity. The Litton advance facility is at LIBOR plus 300. So -- which converts into a fixed rate, I think, of 3.38%. So you can use that for modeling purposes.

The term loan, which started off at $575 million, has been paid down by $14.4 million. So you can back into the borrowing balance that way. And the cost of that is going to be the 550 over LIBOR, plus the 150 floor, plus the amortization of the OID, original issue discount, and commitment fee.

So for the month of September, where we were borrowing the full $575 million, we incurred $3.8 million. And so that was for one month. So you could multiply that by 3 and take the amount down proportional by 2.5% for the amortization that took place already.

Thanks. And last question, your prepayment speeds have picked up a little bit. Still obviously very low. But what is driving the pickup? Generally seasonally, you would see a slowdown in prepayment speeds in the third quarter and in the fourth quarter.

Does it have anything to do with your new program to forgive some of the principal, or what is driving that little bit of a pickup, and where will it go from here? What is your outlook for prepayment speeds?

Bob, I think you are right. We are starting to see the impact of our SAM modification program, which does include principal reductions. So that is probably the largest driver in the tickup. We did have, I think, a pretty good quarter in liquidating REO. So that also may have driven a small portion of the tickup. But I think that what we saw this quarter is probably a reasonable number to look at going forward.

Okay. And then -- sorry -- last question. Foreclosure timeline, has that adjusted at all, longer or shorter?

Well, foreclosure timelines, as you are probably aware, in the industry continue to extend. We, I think, have done a good job of managing foreclosure timelines, but even ours have extended somewhat as well. Although depending on the state, in some states, we actually have started to see those numbers coming down. In other states, you still continue to see them extending.

But I think we've done a little bit better than the industry as a whole, but the industry has seen a continual lengthening of foreclosure timelines.

Thank you.

Mike Grondahl, Piper Jaffray.

Thanks, guys, for taking my questions. The first one, Bill or Ron, if you could just help us -- the $15.7 billion related to Saxon, the $12.9 billion special servicing and then the $10.9 billion, the previous transfers from Saxon, can you just kind of talk about the revenue streams on each one of those buckets and kind of how we should think about it?

Bill, do you want me to take that? Or John, do you want to --?

Go ahead, Ron.

I think that the way that you can look at it is -- why don't we start with the $10 billion plus that we already subservice. When we acquire Saxon, we will in effect acquire the servicing rights on that. And so instead of earning -- this excludes ancillary fees -- just a base servicing fee of probably around 9 basis points or so, that number will go up to 50 basis points. So we will pick up just on the servicing fee piece 40, 41 basis points on that portion compared to what we've been earning to date. So on that piece, if you want to kind of look at it that way.

On the rest of the mortgage servicing rights that we're acquiring -- so I think you used $15 billion, $16 billion -- you know, you can look at that -- as Bill said, we look at all of this on a net present value basis. We've previously disclosed kind of what we expect our overall pretax return levels to be. So you should be able to model that similar to how you've modeled other acquisitions that we've done.

The subservicing piece is probably a little more complicated. The $12 billion or so, there is about $8 billion of that that is subservicing that is related to loans owned by the seller. And much of that is actually prime type product. And we anticipate that some or all of that will transfer away from the platform, if not before the deal closes, soon after. So I wouldn't build much into your thoughts on that component of it.

The remaining component of the subservicing, at this point, there is no guarantees that it will remain with us. As most subservicing deals have provisions in them that allow the owner of the servicing rights to consent to a transfer of servicing or a change of control. But we're hopeful that portion will remain long-term. And although I don't think we are prepared right now to give a lot of guidance on that, we do think that is reasonably high-margin servicing -- or subservicing that would come over.

Mike, another way to -- and I think that is a great presentation, Ron, on that. And I think that probably answers Mike's question more than the way I will answer.

But one way to do this -- because I think it is very difficult to drive most of the models because of the numbers of assumptions that you have to make. But if you think about our portfolio -- and that is why we gave some of these slides -- if you go to slide 6, you really -- our average -- the number you want to know is what we view our equity, our capital that we've designated against the transaction. And on average, we generally generate about 25% return, as you see on slide 6.

Those profiles on those returns depend on how advance-intensive a transaction happens to be. If it is very high advances on the front end, you have a very low yield on the beginning of the portfolio that accelerates more towards the back end as you bring advances down.

So I'm not smart enough to do the spreadsheets the way you have to do it, line item by line item. But if you looked at this quarter and multiplied 25% divided by 4 to get quarterly, and multiplied it times the $739 million that we actually made, you would be within $1 million of our earnings.

Got you.

I'm lazy and stupid. I can tell most quarters what we are going to make if you give me one time pluses or minuses. I have a little bit of an advantage that I know what the maturity of those curves look like, okay, about where -- as we grow faster, our ROE goes down. As we go slower, our ROE goes up.

You saw back in 2007/2008, we were very concerned about liquidity in the market. We didn't grow. Our portfolio was shrinking. Earnings didn't shrink. Return on equity on the portfolio went up significantly because the portfolio aged and matured.

So I think that there are two ways of looking at it. One is inductively and deductively; I think they are both valuable tools. But I would always check your models against that kind of thought process. If you are off a lot, it could be that one of the -- you are put in a position of having to make so many individual estimates in your models to get it right. I think a way of checking it is just to give that overview like that.

And granted, the Saxon deal was very complex, because we have subservicing going out, subservicing coming in, and we have servicing on top of that. But you won't be that far off if you just start looking at these over time with that 25% in mind.

Now, as we grow fast here, you are going to mute that, right? Because you are going to be in the front end of these curves. As they mature, you are going to be much higher than that.

Great. That's helpful, Bill. On a net basis, after maybe that $8 billion goes away from you, how many net loans in units do you think you will pick up from this transaction, just ballpark?

Ron, do you (multiple speakers)?

I don't have that in front of me, with the $8 billion coming out. So that may be something we just have to get back to you on.

Is about 125,000, 140,000 loans? Is that close? Or if you have a number just with the $8 billion, including that.

150,000?

You are asking including the net servicing we pick up, subtracting the subservicing or not? What is the basis again, Mike?

I'd love a net number, but even if you have a gross number, that would be helpful directionally.

The average loan size is what, Ron? It is fairly -- it is higher than normal; it's 175, 200?

Yes, and --. Yes, I think the 125,000 estimate is a pretty good number.

Got you. Just lastly, we clearly appreciate the update on the pipeline, and it sounds to be only growing. But does this Saxon transaction -- are you kind of on hold until this one gets closed or can you line up another one quickly?

We are looking at other transactions as we speak.

Got you. Okay. Thanks, again and congratulations.

The most unique thing about our platform, I think, is its scalability. And that is truly unique in the market today, when there is a tremendous demand for quality, high-touch servicing. And that scalability, I think, was what is showing through right now.

Yes, it has grown from what -- $40 billion to $130 billion, pro forma for Saxon. So it is quite a bit of growth. Thanks again.

Ryan Zacharia, JAM.

Hey, guys. Thanks for taking my question. I have two. Pro forma, if you include the one month of the term loan and the one month of the advance facility, I would have expected a higher swing in interest expense this quarter than we saw. And I know you guys did some work on managing the unused capacity.

But even still, is the run rate for Litton something closer to kind of a $10 million or something closer to a $7 million per month? Incremental interest expense, this is.

We had $9.7 million, which I mentioned, for the month of September for Litton. We would expect that to come down as the senior secured term loan amortizes and as the advance borrowings decline, as we reduce delinquencies.

Okay, great. And then Correspondent One, did Ocwen purchase any MSRs from it in the past quarter?

No.

Does it have any intention to do so in the balance of 2011?

No.

Is there any kind of update on there? Is it progressing as you expected, slower than expected, or are there any kind of operational hiccups or anything of that nature?

I think operationally, it is --. I should probably do this. We actually have an earnings call and we will be covering Correspondent One in more detail on (inaudible).

So can tell you we have purchased our first loan. We've gotten our first bank to approve us as a correspondent. And there is a pipeline on both sides building. We intend to be very cautious and measured in terms of how we grow correspondent one.

So I wouldn't look at it as being a huge driver in 2011 and 2012. That obviously can change in 2013.

The biggest environmental issue that could accelerate it faster would be the current FHFA request for comments on servicing compensation. That could have a significant -- that could be a sea change in the origination side of the mortgage business. But failing that, I think it will be a fairly measured expansion of the business.

Hasn't the correspondent market already gone through quite a transformation with the announced exit of Bank of America? Isn't there something of a void in capacity? And now with HARP 2 in the wings, isn't there kind of a need for the capacity that Correspondent One can provide?

There is a need, Ryan. The big issue you have today is that in the performance space, as a correspondent, you are competing against the large banks that have very low-cost deposits to fund the MSRs. So a change, obviously, in the servicing compensation would minimize or eliminate an MSR, which would open up the markets for new correspondent players to be fairly major players in the space.

So it is really -- that is a -- we think without that, we will be a reasonably successful correspondent player. Obviously, that change -- in terms of the FHFA on servicing compensation, that change would be very, very positive for Correspondent One.

But doesn't your cost of service on FHA, VA kind of subprime like MSRs? I mean, you don't mind capitalizing MSRs and doing that, because you can earn appropriate risk-adjusted returns on capital.

I'm not sure that I understand why the current framework, which is the one that I assume Correspondent was launched under -- Correspondent One, from my understanding, has kind of been in development for quite some time, probably predating discussions of reform of minimum servicing fees and such. On the FHA, VA side specifically, isn't that opportunity as big or bigger than it was when Correspondent One was just a kind of idea in your head?

As I was saying, though, we expect that to be a measured growth with that. My only point is that when you change the servicing compensation, we have a significant competitive advantage over many other players at that particular point in time.

So it actually puts us in a significant competitive lead were that change to occur, not only because of our cost of service, but also because of our access through the Lenders One network, which is now 202 members, and about 6% to 8% of all mortgages that are originated.

So it is just a matter of degree. I think if conditions remain as they are, we will have a measured growth within that business model. Certainly, when we -- if they were to change, we would have, we believe, a significant competitive advantage over most other players.

And then one final question, on the domestic client, onshore. Has there been any traction there?

It is interesting. First of all, as Ron said, we can put our servicing platform anywhere on the planet. If we can do it halfway around the world and in two different hemispheres, we can certainly do it in the United States.

It is interesting, though, when you begin to present to your clients the economic trade-off between domestic and international, how many of them say, oh, international doesn't sound so bad. So I think that if we have a client that wants it, I don't care where you want to put it. I'll put it on the top of the Empire State Building if you want it there. It's just an economic decision for them to reach.

So we are more than happy to put it domestically. We'll put it anywhere they want it. It is just a matter of what the economics are for them. In many cases, people start off by saying they wish to have a purely domestic application. And then when they start seeing the trade-off, they make other decisions.

Also, as Ron said, we do service a number of clients already domestically. We don't make a big deal out of it, but we do service customers with our entirely customer-facing workforce in the United States.

Has there been any kind of expansion of the Freddie Mac relationship?

We haven't gotten any new business since last quarter -- we reported last quarter. There appears -- and I think across the board, there are activities under most players in the market with looking to things to be done. So there is nothing right now to report, but I think there is active consideration on the part of agencies and the large banks to do things.

Right. Thanks a lot, guys.

Henry Coffey, Sterne, Agee.

Good morning, everyone, and let me just throw my congratulations into the hat. And just an aside, Bill, if you could fix Europe, I would really appreciate it. Not your Europe, but all of Europe.

In going through some -- I missed some of these numbers, John. Litton contributed -- do I have it right -- about 14.6% in revenue for the month of September?

Yes, that is the number that Ron mentioned.

Right, and then there were two interest expense items that you shared with us. One was the cost of the facility, the term loan, which is about 3.8% a month. And what was the cost of the servicer advance?

$5.9 billion.

When we looked at Litton, we sort of went in with the assumption that it was -- and you can sort of see it from the data you've shared with us -- a distressed portfolio. So a couple months from now, as delinquencies and loan mods start to work their way through the process, should we expect to see an acceleration in that monthly run rate? And how long do you think it will take before you are able to start to -- ? Because we've seen that with your other acquisitions and subservicing deals.

If you would go to slide 6, Henry, look at the curves.

Right. And Litton is not going to be any different, is sort of what you are saying.

Those [is] Litton.

I'm sorry. You know what I mean (inaudible). Right. Slide 6.

But you are correct. The components of that are increased revenue and also getting delinquencies down.

Right. I'm just saying what's the timeline on that? It happens -- I'm looking here. I'm just going to -- I mean, is this sort of -- this is acceleration? It looks like it occurs sort of during the first -- course of the first year, and happens a lot more quickly in the back half of the first year. Is that the way to think of it?

I think probably the best guidance for that is on slide 5, looking back at the prior Saxon and HomEq acquisitions.

And so Litton won't be all that different?

We don't expect it will.

Litton has a lower, though -- right -- fixed fee, slightly, right?

Right. The Litton average contractual servicing fee is 46 basis points. That's Litton relative to -- and these other two portfolios were at 50. But Litton has higher deferred servicing fees because the delinquencies are higher relative to HomEq, but a little bit lower relative to Saxon.

So I think if you were to look at the -- perhaps at the average of the two and take out a few basis points, based on the different contractual servicing fees, that would probably be a pretty good approach.

This is helpful. And then in terms of trying to understand Saxon, you've got $10.5 billion that you are subservicing, but you will be servicing and that looks like it is subprime. I know Saxon kind of have a blend of both. The $16 billion of acquired servicing, was that GSE or subprime that you bought?

Subprime and Alt-A.

So those fees are closer to 50, or at 50?

At 50.

And then -- so it is really the only question mark is the $12 billion of subservicing. You get about half of it. But isn't some of this -- I guess, I'm just looking at the reported data that we get from the various public services. But I thought a percentage of the Saxon portfolio was with the GSEs.

Most of that is in the subservicing category. And that would include some of the stuff that we hope will be retained. But I think all of that is pretty much in the subservicing category.

And those are relatively lower fees?

There is generally lower fees. There is usually incentive fees. The GSEs have incentive fees that attach to those. So again, it is a little hard to project exactly the revenue numbers from those at this point. But you know, the fees are -- the upfront fees are lower, but there are incentive fees.

This sort of leads into that question -- I know that Saxon has been identified as having a very strong relationship with Fannie. And it is that a business relationship that you think will transfer with the acquisition, and kind of help you in marketing into DC?

And are there things that you can do in terms of how you structure business, plus how you use those acquired relationships, that could help improve your relationships with some of the GSEs? I know in your slides it is kind of clear that there is not a lot of business coming from Fannie Mae.

I think that -- first of all, I think Saxon probably has relationships with both of the GSEs, maybe even a little stronger on the Freddie Mac side. I don't think we acquired the platform for that reason, but we will always try to build off of any opportunities we get. I think Ocwen is still working to try to earn our chance to do some Fannie Mae business, and we are not there yet.

Great. Well, listen -- great quarter and thank you for all your help with these numbers.

DeForest Hinman, Walthausen & Company.

I had a few questions. Just to doublecheck this math, on the acquired UPB, it is the 26.6 is the acquired MSR. And then is there an incremental $12.9 billion that is available, so I add those two together and it is $39.5 billion? Is that the right math, or am I doing this wrong?

Yes, assuming that all of the subservicing moved over, yes. Although we have $10.9 billion is already reported in the subservicing category (multiple speakers).

Okay. I understand that.

(multiple speakers) current results.

Okay, thank you. And my next question was, what type of rates are we looking at with the funding advance facility and then potential term loan?

For the Saxon transaction?

Yes, for the Saxon transaction.

The rates are LIBOR plus the mid to high 2s.

On both the funding advances and the term loan, or are there two different (multiple speakers)?

That would be on both committed advance facilities. We would expect that if we went out into the market to raise additional corporate debt through the term loan that we would have similar pricing, based on the fact that that is trading at par as of last time I checked.

So that would be -- we would expect the LIBOR plus 550, the 154. And based on a term sheet that we had received for such an offering, a 150 [LID].

Okay, that's helpful. And for modeling purposes, can you walk us through the different line items are for the $18.7 million on the income statement?

So you're interested in knowing how much hit each of the P&L line items. So $12.9 million was in compensation and benefits. $200,000 was in servicing and origination. $1.6 million in technology and communication. $1.9 million in professional services. $1.5 million in occupancy and equipment. And $700,000 in other. That may not add up due to rounding, but it should be close.

Okay, that's helpful as well. And then I read through both the agreements on Litton and Saxon. I just wanted clarity on do we inherit the HAMP residual payment streams from both these deals or not?

Yes, we do.

Okay. And my last question is on the timing of the HLSS deal. I think when I spoke with Ron in the past, he said he thought that we would be transacting with HLSS by the end of the year. Now it sounds like potentially in a few months. We're already in October. And then it led me to think, did the Saxon deal in any way inhibit us from doing that HLSS IPO?

No.

Okay. Thank you.

Mark Devries, Barclays Capital.

Could you just give us an update on how much more servicing rights may come available for acquisition over the next year?

Yes, I mean, we are aware today -- and we may not be aware of all that is out there -- but we are aware of about $300 billion that is currently in various stages of consideration.

Are you seeing a broader push by the GSEs also for sales of servicing rights?

What we are seeing is, quite frankly, I think most servicers, I'd divide them in two different categories. One category is the people that -- where it is not a major core element of the business, and those where it is.

Those where it is not a major core element of the business, things such as Litton and Saxon, et cetera, you see many of those players actually looking to completely exit the business, because it simply doesn't meet with their strategic objectives.

With the larger players, so where it is a major core part of their business, even those are basically, if you will, strategically repositioning how they look at the business. Or many of them are strategic -- I shouldn't say all -- many of them are strategically looking at how they want to position that business, and trying to determine whether all -- you know, all of their portfolios are not, quote, strategic. They are not central to their business model. So I think you will see a lot of that coming to pass in terms of additional sales, to really reorient and refocus their operations around their core -- what they consider to be their core strategy.

Is most of the servicing you're seeing coming up what you kind of consider special servicing that's kind of in your wheelhouse?

Yes, that is all we're really looking at. All servicing is not created equal in our eyes. There is quite a bit of difference in the economics and the attractiveness of the servicing that is out there. So we are looking for servicing, quite frankly, that is where we have -- we believe we have a distinctive, competitive advantage, or where the person wants to sell servicing, primarily because we have a competitive advantage in terms of getting advance financing from lending institutions. We can show up to a deal with a fully-funded deal, and there are very few if no other players we believe that can do that.

Secondly, we like deals that are very -- that are more delinquent, because that, in fact, plays to our strength on being able to get those portfolios more current. It also leads to higher operating costs. And they are basically more capital-intensive that we can make less capital-intensive over time.

So we are -- there are certain types of deals where we think we can generate higher returns, as reflected on slide 6, and also basically where we think we have a distinctive competitive advantage over other players.

With things such as HomEq, Litton, Saxon, they all somewhat look alike. They are all subprime portfolios with -- they were sales that -- and financing wasn't -- the ability to finance was an integral part of the transaction. And that really relates to the operations that John Van Vlack has and our ability to be absolutely right on in terms of managing advance balances, understanding exactly what is going on in those portfolios, and being able to report timely and accurately to the lending institutions.

Okay. Thanks.

At this time, I am showing no further questions.

Thank you very much, everybody. Have a great day. Thank you.

This does conclude today's conference. Please disconnect at this time.